When a company is sold, it is common for the purchaser to defer payment of some of the purchase price until the results of the current, and sometimes subsequent, trading periods are known. The amount finally payable may vary according to the results of the business and this is known as an earn-out.
Structure of earn-out
Such earn-outs have invariably been structured for tax purposes, so that once the agreed targets are achieved, rather than paying cash, the purchaser would issue loan notes (or occasionally shares) to the sellers. The loan notes would typically be held for at least six months and would then be cashed in. This is in order to fall within TCGA 1992, s 138A (see D6.208A, D6.208B), whereby any capital gains tax that would have arisen on the value of the earn-out consideration is deferred until it is encashed. When the loan notes or shares are sold, part of what is received is the earn-out right, which is deemed to be a security, and when the earn-out is determined,
To continue reading
View the latest version of this document, as well as thousands of others like it, sign in to Tolley+™ Research or register for a free trial
Web page updated on 17 Mar 2025 17:42